Archived Speeches
Joe Leonard
Chairman and CEO, AirTran Airways
Aero Club Washington, DC
March 22, 2005
Buying Trouble: The High Cost of Subsidizing Failure
Thank you so much, Rob, for your kind introduction.
It's great to be here at the Aero Club...and I appreciate each of you taking the time to join me.
Before I begin, I also want to extend a special welcome to FAA Administrator Marion Blakey. Thank you for being here, Marion.
[Long pause.]
At a time when efficient, low fare service is helping Americans return to the skies, we are making it more difficult for the airline industry to function as a free market, competitive system.
As a nation, we are buying trouble - and we are buying it hand over fist, by the billions of dollars.
Struggling legacy carriers continue to go to market with failed, discredited business models.
Models that haven't worked in years and aren't going to work going forward.
For many of these old-school carriers, the goal is not making money but surviving.
Instead of cutting costs and running efficiently, these carriers are getting by on public assistance, riding on the backs of America's taxpayers.
Desperate, they are scrambling just to keep flying.
And that changes a lot of dynamics in this business, none of them for the better.
[Pause.]
As a nation, we are subsidizing failure on a grand scale.
And we are paying a steep price.
In perpetuating inefficiency...
Discouraging innovation...
And depriving the American people of the great benefits of free competition.
[Pause.]
Today, the old legacy carriers are being propped up and sustained artificially in three basic ways.
Number one, by the bankruptcy code.
Number two, by government subsidies and special breaks.
And, number three, by what amounts to subsidies from elements of the industry.
[Pause.]
Bankruptcy used to be a measure of last resort. But not anymore. Instead, legacy carriers are using the bankruptcy code as a more-or-less routine part of business planning. No longer a black mark, bankruptcy is increasingly seen as a smart and savvy means to duck your credit obligations and live to fly another day. Bankruptcy is allowing old-school carriers to avoid dealing with marketplace realities - at least for a moment. And, as we've seen, a moment is as long as some bankruptcy tactics last. One airline has already had two quick trips into Chapter 11. If you didn't know better, you might have thought they were just looking to score mileage points on their bankruptcy legal bills. And they would have gotten lots of points, too, considering that the bankruptcy lawyers - at 900 bucks an hour - are making twice as much as the bankrupt companies' CEOs. In the end, Chapter 11 hardly guarantees a carrier will emerge with a workable plan for success. On the contrary, many carriers are using the bankruptcy laws to leave their debt obligations behind - and hold onto the same failed business plans.
[Pause.]
Honest competition is also being frustrated by government subsidies and special breaks. Of course it was appropriate, after September 11, for government to safeguard the stability of our industry. And, in the aftermath of the attacks, the Air Transportation Stabilization Board provided vital support to an industry in crisis. Even so, the ATSB was intended to be a temporary source of limited assistance to carriers injured by extraordinary events, not an ongoing source of subsidies to carriers held back by the workaday shortcomings of their own failed business plans. [Pause.]
There is an old saying about borrowing money.
Borrow a little, and you gain a creditor.
Borrow a lot, and you gain a partner.
Today, a number of legacy carriers are borrowing by the billions...and gaining the most powerful economic partner in the world: our federal government.
With a partner in government, some carriers are now being allowed to delay loan payments while adding new flights - and the costs such flights represent.
In this, they are using government loans - backed by taxpayers - to wreak unnatural havoc in the marketplace.
To obtain ATSB loan guarantees, carriers were required to demonstrate sound business plans.
But, with the loans in place, they were not again forced to justify their plans, show that other events had not made the plans worthless, or, ultimately, hold the line on costs.
[Pause.]
Consider one airline. In 2003, the carrier promised most of its assets to the government in exchange for a billion dollars in loans.
Today, the government is allowing that airline to use loan collateral to pay expenses.
[Pause.]
Our government is also subsidizing troubled carriers in other ways. Last spring, Congress passed a pension relief bill that allowed some older carriers to stretch out payments to employee pension plans. The bill handed these carriers a windfall of between $300 million and $500 million. A windfall, by the way, that was promptly poured into the same broken-down business plans that originally created the pension-payment jam.
And that's not all. Additional proposals would offer further pension relief - and put hundreds of millions of dollars more in legacy-carrier coffers.
Some states are crafting their own giveaways.
In Georgia, for example, the legislature is considering special sales tax breaks benefiting just one company: the major airline serving Atlanta.
[Pause.] Now, I'm not here to question the motivations of folks in this city - our legislators, our regulators, and the fine people at the ATSB. I believe our public servants are acting in good faith. Unfortunately, that good faith is simply not producing the best results for the flying public or the public at-large. Instead, good-faith policy choices are artificially propping-up distressed carriers to the frustration of market forces... the disadvantage of well-run carriers... and, ultimately, the injury of the public.
[Pause.]
Beyond being propped-up by the bankruptcy laws and various government subsidies, struggling carriers are also cultivating unique breaks from other companies.
Today, some key lessors and suppliers are cutting deals to help keep their airline clients flying.
While such suppliers are free to act in their own interest, their actions show that marketplace distortions and subsidies come in many forms.
And such special breaks spotlight yet again the failure of the legacy carriers to modify their unworkable business plans.
[Pause.]
So, how do we move forward?
The answer is simple.
Not easy. But simple.
To move forward, we must usher in a new era of freedom and competition and deregulation in our industry.
While more competition won't guarantee the survival of every old-school carrier limping along on subsidies, more competition does have the power to bring the industry back... expand the overall market... and help us serve the American people better than ever before.
[Pause.]
To be sure, however, a truly free market includes the freedom to fail.
There are significant barriers to entering this business, but they pale in comparison to the barriers to exiting it.
Remember the line in Apollo 13: "Failure is not an option."
Today, some are saying that failure is not an option, at least not for a select group of carriers.
That, frankly, is a mistake...and we should remove artificial barriers to exiting this business.
[Pause.]
More free competition, then, means phasing out subsidies...and lowering the barriers to exit.
In addition, there are three other things we can do to free up competition - and create more benefits to consumers.
One: we need to pull down the barriers to airport and gate access that are keeping efficient carriers from competing in some of our busier airports.
And this includes the restrictions that now favor regional jets.
After all, if we're free to fly a 50-seat RJ from a small community to LaGuardia, why not a clean, noise-free, efficient, 117-seat jet?
Current DOT restrictions just don't make much sense.
Two: we need to look carefully at the purpose of mergers and alliances.
While not necessarily uncompetitive, mergers and alliances CAN serve uncompetitive purposes like unfairly hoarding gates and slots.
Three: we need to reign in taxes and fees.
Federal taxes and fees on flying are now higher than those on liquor and cigarettes - and our customers need relief.
[Pause.]
Free market competition works.
In our time, in our industry, we have seen the power of the market up close.
After 1978, competition democratized air travel, giving millions of middle-class Americans more opportunity to travel than ever before.
Airline competition has made us a freer nation, a more-connected nation, and, yes, a better nation.
[Pause.]
Leading AirTran Airways has given me a unique perspective on the power of competition.
For AirTran Airways, efficiency is the key.
Yes, our customers like our low fares.
But you can't stay profitable for six years, as we have, without being efficient.
Working as a team, our committed crew members have found lots of ways to increase utilization of our aircraft, gates and personnel.
In our efficiency, we have spent money on our customers and the youngest all-Boeing fleet in the skies today.
At AirTran Airways, we pride ourselves on giving customers what they want.
Simplicity...value...and hub-to-hub competition with the legacy carriers.
When AirTran Airways enters a market, we make an impact.
Fares drop 50 percent and more...
New traffic surges 150 to 500 percent...
Passengers save lots of money...
And communities win big.
In fact, according to the DOT, travelers through our Atlanta hub alone reap $1 billion a year in competitive savings.
[Pause.]
AirTran Airways and other competitive carriers continue to change the industry.
There's been a lot of hubbub about recent moves by some old legacy carriers to simplify fares and end Saturday-night-stay requirements.
These are welcome changes - and changes that just wouldn't have happened without competitive carriers.
[Pause.]
Today, it is time for more competition. And a level playing field.
It is time to phase out the subsidies...
lower the barriers to exit...
open up access...
watch mergers and alliances...
and slash taxes and fees.
Yes, there are winners and losers in a free market, just as there are winners and losers in an over-regulated market.
Only in a free market, the biggest winners are consumers.
So let's try more competition, not more subsidies.
And usher in a new season of freedom and deregulation and opportunity for all.
[Pause.]
Seventy-eight years ago this week, Charles Lindbergh registered his entry in an international challenge to become the first flyer to cross the Atlantic Ocean alone.
Two months later, in May of 1927, Lindbergh's solo crossing became one for the history books.
It took a special kind of boldness and courage to take on that challenge and follow it through to completion.
Today, the world of aviation is very different.
But I believe we must have a similar sort of boldness and courage if we are to take on our challenges and turn them, as Lindbergh did, into triumph.
[Pause.]
One thing is certain, though.
This will not be a solo flight.
We'll need other competitive carriers spreading the word.
We'll need friends of the free market in this city to take the long view...ask the tough questions...and reconsider some current assumptions.
And we'll need the American people to demand straightforward and honest competition - the sort that benefits consumers most of all.
[Pause.]
For now, our government is buying trouble.
As taxpayers, we are subsidizing failure...and we're getting more of it.
That's what we're doing today.
And it needs to end.
Ultimately, there is nothing wrong with our business the free market can't fix.
But we must have the boldness and the courage to do something new.
To stop buying trouble...
Stop subsidizing failure...
And let the power of free and uncontrolled competition transform this industry for the better.
It isn't too late.
But it is time to get on board, push back from the gate, and get moving.
Thank you for having me, thank you for your attention, and God bless you all.
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